BUSINESS

OWNERSHIP
MODULE 5
BUSINESS OWNERSHIP

Business ownership refers to the legal

and financial control over a business
entity. It encompasses the rights and
responsibilities of individuals or entities
who own and operate a business or
company
Types of Business
Ownership Structures
1. Sole Proprietorship
This is the most common form of business
ownership and the simplest. Sole proprietorship
means that a business is owned and directed by
one individual. This individual owns all the rights to
run the business however they deem fit. In other
words, if you start a brand new business, and you
are the only person owning and running the
business, it is considered a sole proprietorship (
sole trader).
SOLE PROPRIETORSHIP
ADVANTAGES DISADVANTAGES
• All income earned belongs to the sole • The proprietor bears personal
proprietor, who also owns all business responsibility for all business debt
assets. and losses.
• It is the simplest of all the business • There is little to differentiate
structures to set up. between personal and business
• It provides the proprietor with income.
flexibility in running the business. • Raising capital is the responsibility of
• The sole proprietor gets to make all the sole proprietor.
business decisions.
• Absence of corporate tax.
2. Partnerships
• An unincorporated business
structure that two or more parties form
and own together is called a partnership.
These parties, called partners, may be
individuals, corporations, other
partnerships, or other legal entities.
TWO TYPES OF PARTNERSHIPS
General Partnership Limited Liability Partnership
this involves an investment (LLP)
from all partners, and all LLP provides protection for each
partners bear the responsibility partner against debt incurred by
for any debt incurred by the the other partner(s). It usually
business. The partnership requires a formal agreement
usually doesn’t need a formal between partners to protect each
agreement as it could be verbal from the actions of the others.
between business owners.
PARTNERSHIPS
ADVANTAGES DISADVANTAGES
• Business capital can be easily • Partners are responsible for
generated from each partner's losses or debt incurred by the
resources. business.
• Profits from services offered by the • The risk of friction among
business are shared between partners can be high.
partners.
• Partners can be held liable for
• Ownership and decision making
the actions of other partners.
are shared by partners .
• Greater capacity for loans.
Types of Partners in a Business
• Active or Managing Partners
• Inactive or Sleeping Partner
• Nominal Partner
• Partner in Profits only
• Secret Partner
• Sub-partner
1. Active or Managing Partners
• An active partner is an invested person who is
involved in the daily operations of the
partnerships . An active partner helps run the
business to enhance his or her returns and is therefore
considered a material participant. This person
typically shares more risk and return.
• Because they are actively involved, an active partner is
still exposed to unlimited liability. In this
arrangement, even innocent active partners can be
held responsible if another partner commits illegal
actions that involve the firm.
2. Inactive or sleeping partner
• An inactive partner is not involved in the day-
to-day operations of the partnership firm.
But other partners might consult with them when
making important decisions for the company.
Similar to other partners, a sleeping partner
contributes a fair portion of capital to the
business and shares its gains and losses.
Outsiders may not be aware of this partner's
relationship, but they invest in the company and
are responsible for paying off any debts on the
company's behalf. They have limited financial
3. Nominal Partner
• A partner who allows the partnership firm
to use his/her name but does not contribute
any capital or take part in the management
and affairs of the business. He does not
share the profits and losses of the firm but
he is liable to the creditors for the
repayment of the firm's debts.
4. Partners in Profits only
• A partner who enters the partnership firm
as a 'partner in profits only' partakes in
profits but is not responsible for any losses.
Even when engaging with third parties,
they are only accountable for their profit-
making activities and do not share any
other liabilities. They do not participate in
firm management and are not accountable
for the company's business decisions.
These types of partners often join a
 5. Secret Partner
• A secret partner is a partner whose affiliation
with the company is unknown to the broader
public. The secret partner occupies the space
between the active and sleeping partners.
They invest capital, enjoy profits, share
losses, take part in business management
and are subject to unlimited liability. But they
keep their membership a secret from
outsiders and other parties. A silent partner
is similar to a secret partner but does not
 6. Sub-partner
• A third party who shares a stake in a company
with an existing partner is a sub-partner. This
occurs when a partner consents to divide the
company's profits with another party. The
relationship is between them and the partner
and not between the sub-partner and the
partnership firm. A sub-partner is not an
entity of the firm and has no obligations
to the firm as a result.
3. Cooperatives
• A cooperative is a business structure whose
owners are consumers of its services. It is
operated to provide benefits to those
people. It often aims to pursue economic,
social, or cultural goals.
3. Cooperatives
• Cooperatives are businesses owned by
“member-owners”. Co-ops are
democratically controlled by their member-
owners, and unlike a traditional business
each member gets a voice in how the
business is run. Services or goods provided
by the co-op benefit and serve the member
owners.
3. Cooperatives
• Cooperatives are also based on the values
of self-help, self-responsibility, democracy,
equality, equity, and solidarity. Cooperative
members believe in the ethical values of
honesty, openness, social responsibility,
and caring for others.
4. Corporation
• A corporation is a legal entity created by
individuals, stockholders, or shareholders,
with the purpose of operating for profit.
Corporations are allowed to enter into
contracts, sue and be sued, own assets,
remit federal and state taxes, and borrow
money from financial institutions.
• How Do Corporations Work?
• A corporation is required to name a board of directors before it can
commence operations, and the members of the board of directors are
elected by shareholders during the annual general meeting. Each
shareholder is entitled to one vote per share, and they are not required
to take part in the day-to-day running of the corporation. However,
shareholders are eligible to be elected as members of the board of
directors or executive officers of the corporation.
• The board of directors comprises a group of individuals who are elected
to represent shareholders. They are tasked with making decisions on
major issues affecting the shareholders, and they also create policies to
guide the management and daily operations of the corporation.
• The elected members to the board of directors owe a duty of care to the
shareholders, and they must act in the best interests of the shareholders
and the corporation.